Independent Bank Corporation (Nasdaq: IBCP) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Independent Bank Corporation provides banking services primarily in Michigan’s Lower Peninsula, with a loan production office in Ohio. Financial amounts below are in millions unless noted.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $38.4 | $36.1 | $76.8 | $69.1 |
| Provision for credit losses | $3.3 | $2.4 | $5.5 | $0.8 |
| Non-interest income | $15.4 | $14.6 | $26.0 | $33.6 |
| Non-interest expense | $32.2 | $32.4 | $63.2 | $63.9 |
| Net income | $14.8 | $13.0 | $27.8 | $31.0 |
| Diluted earnings per share | $0.70 | $0.61 | $1.31 | $1.45 |
- Margins: Q2 GAAP net interest margin was 3.23%, versus 3.21%; fully taxable-equivalent (FTE) margin was 3.26%, unchanged. Six-month GAAP margin was 3.26%, versus 3.09% (FTE: 3.29% versus 3.13%).
- Balance sheet at June 30: Assets were $5.14 billion; loans $3.63 billion; deposits $4.49 billion; and shareholders’ equity $375.2 million. Loans grew $165.8 million and deposits grew $108.6 million from December 31, 2022.
- Liquidity and debt: Cash and cash equivalents were $129.2 million, up from $74.4 million at year-end. Other borrowings were $90.0 million; subordinated debt and debentures totaled $79.2 million. The company reported unused FHLB and Federal Reserve credit lines of approximately $926.9 million and $476.5 million, respectively, plus estimated borrowing capacity of about $800.1 million against unpledged securities.
- Cash flow, first six months: Operating cash flow was $33.3 million, investing cash outflow $77.6 million, and financing cash inflow $99.1 million, resulting in a $54.8 million increase in cash and cash equivalents.
- Capital and credit: The bank was categorized as well capitalized. Bank capital ratios included 12.36% total risk-based capital, 11.11% Tier 1 and common equity Tier 1, and 8.72% Tier 1 leverage. The loan allowance was $54.0 million, or 1.49% of loans; nonperforming loans were $4.0 million, or 0.11% of loans.
Material changes versus comparable periods
- Q2 net income increased about 14% year over year, chiefly as higher net interest income and non-interest income and slightly lower expenses outweighed higher credit-loss provision and taxes. Six-month net income fell about 10%, reflecting substantially higher credit provision and lower non-interest income, partly offset by higher net interest income and lower expenses.
- Higher loan yields lifted interest income, but deposit and funding costs rose sharply as market rates increased. Management said deposit mix changes and pricing sensitivity were expected to continue pressuring margin during 2023.
- Six-month non-interest income declined $7.6 million, principally because mortgage servicing income fell to $4.4 million from $13.8 million. This reflected much smaller fair-value gains on mortgage servicing rights than in 2022. Q2 non-interest income nevertheless increased year over year.
- Loans grew across commercial, mortgage and installment categories. Deposits increased through reciprocal, time and brokered time deposits, while non-interest-bearing and savings/checking balances declined. Reciprocal deposits rose to $721.0 million; brokered time deposits were $250.8 million.
- Accumulated other comprehensive loss improved to $80.5 million from $92.8 million at year-end, mainly due to improved AFS securities marks. AFS securities still had $73.5 million of gross unrealized losses; HTM securities had fair value of $321.9 million versus $360.9 million carrying value.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described itself as cautiously optimistic about managing risks but noted substantial uncertainty around macroeconomic conditions and future loan performance.
- Management cited inflation, rising rates, energy prices, supply-chain disruption, geopolitical uncertainty and foreign-exchange volatility as risks that could impair asset values, including securities, loans, servicing rights and deferred tax assets.
- Management said the failures of Silicon Valley Bank and Signature Bank had little to no effect on the company’s deposit base apart from mix and pricing, and stated that liquidity, funding and capital resources remained strong. However, industry stress could increase deposit competition, funding costs, liquidity pressure, credit losses, FDIC assessments or regulatory burdens. Uninsured deposits were $918.5 million, 21.7% of deposits; the top 100 depositors represented 19.1% of deposits.
- A $3.0 million HTM corporate security issued by Signature Bank defaulted in Q1 and was fully charged off, producing a $2.99 million provision. The company reported no credit-loss allowance on AFS securities.
- Q2 included $3.27 million of common-stock repurchases; 200,000 shares were repurchased in the first half. The board’s plan authorized repurchases of up to 1.1 million shares through December 31, 2023. Dividends declared were $0.23 per share for Q2 and $0.46 per share for the first half.
- The company disclosed ordinary-course litigation; accrued probable losses were immaterial and estimated additional reasonably possible losses were described as insignificant, though outcomes remain uncertain. Visa Class B shares were carried at zero; management cited an indicative value of approximately $4.7 million based on a stated conversion ratio and July 27 Visa share price, subject to transfer and conversion uncertainty.
Investor verification priorities
- Assess deposit retention, pricing and concentration, including uninsured, reciprocal, brokered and other wholesale funding, and verify continued access to contingent borrowing capacity.
- Track deposit costs, funding mix and net interest margin as rates and customer behavior change; review the assumptions and limitations of the company’s interest-rate simulations.
- Review commercial credit exposures, specific reserves, delinquency trends and the adequacy of the $54.0 million loan allowance as loan growth and economic conditions evolve.
- Evaluate securities duration and unrealized losses, including the gap between HTM carrying value and fair value, and the company’s ability to hold securities until recovery or maturity.
- Distinguish recurring earnings from volatile mortgage servicing-rights marks, mortgage loan sale margins and other fair-value changes; confirm the drivers of the year-to-date decline in non-interest income.
- Confirm actual repurchases, dividends and capital ratios against regulatory requirements and the company’s liquidity and capital needs.